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- Title
Framework of Credit Metrics Methodology for Computing Credit VaR.
- Authors
Malhotra, Yogesh
- Abstract
Financial institutions face many risks which increase the degree of uncertainty about future net returns. Credit risk can result in potential losses for a company and is a function of the credit exposure, the probability of default and the loss in the event of default. For a given credit instrument portfolio of credit obligations such as a portfolio of corporate bonds or swaps, Credit Value-at-Risk (VaR) quantifies how much at most can be lost with a given probability over a specific time horizon. The associated CreditMetrics Methodology, originally introduced in 1997 by JP Morgan, is now considered the industry standard along with Credit VaR for credit risk modeling. The CreditMetrics methodology is used for assessing portfolio risk due to changes in bond or debt value caused by credit quality changes, including credit migration (upgrades and downgrades) as well as default. It measures the uncertainty in forward value of the bond portfolio at the risk horizon caused by such credit events. CreditMetrics offers better understanding of credit risk in terms of diversification benefits and concentration risk compared to standard capital adequacy measures. This paper provides a framework for using this methodology.
- Subjects
J.P. Morgan Chase &; Co.; CREDIT risk; BONDS (Finance); CORPORATE bonds; FINANCIAL institutions; VALUE at risk; DEFAULT (Finance)
- Publication
IUP Journal of Financial Risk Management, 2022, Vol 19, Issue 3, p38
- ISSN
0972-916X
- Publication type
Article